Fine v. Harney County National Bank

Argued on rehearing April 15; former opinion set aside and case reversed July 1, 1947 ON REHEARING (182 P.2d 379) REVERSED. Recurrence to fundamental legal principles, which, although not overlooked, were not properly applied, leads to the conviction that our former decision of the question involved on this rehearing was erroneous and must be set aside.

Plaintiffs J.B. Fine and Ethel Fine, his wife, had a joint account in the Harney County National Bank. Fine and Brown, the vice president and assistant cashier of the Bank, engaged in a private business transaction which terminated in an agreement that Brown owed Fine $7,650.00. The Bank was not a party to this transaction nor in any way concerned in it. To pay this indebtedness Brown gave Fine his check for the amount thereof drawn on his personal account at the Bank. Fine endorsed the check and immediately thereafter Brown accepted it for deposit in the Fines' joint account. This occurred at the Bank after banking hours when no other officer or employee of the Bank was present. Brown's check was worthless. The amount thereof was not charged against his account, nor entered as a credit on the Fines' ledger sheet kept by the Bank; the check itself was never found among the Bank's papers, nor was the deposit slip, a duplicate of which was received by Fine; there was no record of the transaction in any of the books of the Bank and no evidence that any officer or employee of the Bank, other than Brown, had any knowledge of the issuance of the check or its deposit until after the Bank failed some nineteen months later. If the plaintiffs should prevail in this action it will be solely because of Brown's fraudulent act, of which the Bank had no notice, and the Bank will be saddled with Brown's debt to Fine. The question is: Did Brown have authority to accept the check for deposit? It is conceded that if he represented the Bank in the transaction the Bank is bound. 2 Morse on Banks and Banking (6th ed.) 1216, § 569; 6 Zollmann, Banks and Banking (Perm. ed.) 197, § 3818; 5 Michie, Banks and Banking (Perm. ed.) 49, § 26; 7 Am. Jur., Banks, 327, § 457;Oddie v. National City Bank, 45 N.Y. 735, 6 Am. Rep. 160;Cohen v. First National Bank, 22 Ariz. 394, 198 P. 122, 15 A.L.R. 701, with annotation at pp. 709 et seq. It is also conceded that as assistant cashier he had general authority to accept deposits. But it is contended that he was without authority to accept for the Bank the deposit of his own check given by him to pay a personal debt, thereby making the Bank liable for the amount of such check, and that Fine was put on notice of his want of authority by the transaction itself.

It is an established principle of the law of agency that an agent cannot bind his principal in a matter in which his own interest conflicts with the duty he owes his principal. Haines v. First National Bank, 89 Or. 42, 49,172 P. 505; State v. Miller, 47 Or. 562, 566, 85 P. 81, 6 L.R.A. (N.S.) 365. As stated in 1 Mechem on Agency (2d ed.) 535, § 754: "It is often said that his endeavor to do so operates as an immediate revocation of his authority. That an agent undertakes to do so is therefore enough to put the other party on his guard." So it is held, when the question is as to the interpretation of an authority expressly conferred, "that a general power or authority given to the agent to do an act in behalf of the principal does not extend to a case where it appears that the agent himself is the person interested on the other side. If such a power is intended to be given, it must be expressed in language so plain that no other interpretation can rationally be given it, for it is against the general law of reason that an agent should be intrusted with power to act for his principal and for himself at the same time." Bank of NewYork v. American Dock Trust Co., 143 N.Y. 559, 38 N.E. 713 (per Peckham, J.). See, also, Restatement, Agency, § 389, 3 C.J.S., Agency, 9, § 139, 184, § 253; 2 Am. Jur., Agency, 204, § 253; Michoud v. Girod, 4 How. 503, 555, 11 L.ed. 1076.

Upon this principle it was held in Claflin v. Farmers' Citizens' Bank, 25 N.Y. 293, that a general authority to the president of a bank to certify checks drawn upon it does not extend to checks drawn by himself. "The act of the agent", it was said in that case, "is deemed to be unauthorized, and the contract is void." That case was decided in 1862, and the rule which it establishes has never, so far as we are aware, been questioned by any court. See Rankin v. Chase National Bank, 188 U.S. 557, 47 L.ed. 594, 23 S. Ct. 372; Statev. Miller, supra, 47 Or. 567.

It was upon this principle likewise that the Wisconsin court inSchwenker v. Parry, 204 Wis. 590, 236 N.W. 652, and ColumbiaBank v. Morgan, 198 Wis. 476, 224 N.W. 707, decided that an officer of a bank is not authorized to accept for deposit his own check on the bank given in payment of his personal debt, and that the payee of the check is charged with notice of his want of authority. We considered these cases in our former opinion, but, for the reasons there stated, felt justified in declining to follow them. Since the filing of the petition for rehearing our attention has been called to Haynes v. Lincoln Trust Co.,141 Me. 100, 39 A.2d 657, decided October 26, 1944, a case squarely on the point which had not been cited in the briefs of counsel. The Maine court, in an able and well reasoned opinion, took the same view of the question now before us as the Wisconsin court.

The only other jurisdiction, so far as we are advised, where the identical question has been determined is Minnesota, in the case of Pope v. Ramsey County State Bank, 137 Minn. 46,162 N.W. 1051. We followed that decision, approving the distinction which the Minnesota court drew between a case like the present one and cases which, as that court said "relate to obligations of corporations made out by the officer or agent who used them for his personal purposes to the knowledge of those who received them." Instances of this sort are where a bank officer, to pay his own debt, gives to his creditor a certificate of deposit of his own bank, drawn by himself, or a draft drawn by the officer on another bank, or issues to the creditor a deposit slip showing a credit in the amount of the officer's indebtedness. Hier v. Miller, 68 Kan. 258, 75 P. 77, 63 L.R.A. 952; C.M. Condon Company State Bank v. Richardson,117 Kan. 695, 232 P. 1070; Greer v. Farmers' National Bank of Sulphur,174 Okla. 46, 51 P.2d 792; First National Bank of Sweetwater,Tex. v. Rust, 257 F. 29 (C.C.A. 5th), certiorari denied,250 U.S. 667, 63 L. Ed. 1197, 40 S. Ct. 13; Bliss v. Live StockNational Bank of Omaha, 122 Neb. 668, 241 N.W. 106; HollandBanking Company v. Republic National Bank, 328 Mo. 577,41 S.W.2d 815; State ex rel. Davis v. Farmers State Bank of Hadar,111 Neb. 585, 197 N.W. 386; and State v. Thedford Bank,114 Neb. 534, 208 N.W. 627. To this class of cases we might have added those in which it is held that a bank officer has no authority to certify his own check.

Upon reexamination of the question, we are forced to the conclusion that the distinction is more apparent than real, since in a case of this kind, no less than in any of the others, the bank officer assumes conflicting positions and attempts to represent the corporation in a matter in which his own interest is opposed to the duty he owes to his principal. Where a depositor presents to a bank officer for deposit a check drawn on the latter's own bank, it is his duty to determine whether the check is good, and, if it is not to refuse to accept it. That duty in this case conflicted with the interest which the assistant cashier, Brown, had to discharge his private debt by accepting for deposit his own check, which he knew to be worthless. Fine did not know that the check was worthless, but he did know that Brown, as the court said in Haynes v. LincolnTrust Co., supra, "acted in a dual capacity as principal and also as agent of the Bank." The law charged him with that knowledge. The fact that the bank officer is personally interested in a transaction of this character is sufficient to put the creditor upon notice of the extent of the former's authority. Hier v. Miller, supra.

In our former opinion we distinguished such cases as Hier v.Miller, supra, (in which the bank officer merely issued a deposit slip to his creditor) by saying that the person accepting the bank obligation or memorandum of credit is placed on notice that the officer is using bank funds for his private ends. Similarly, the court in Pope v. Ramsey County State Bank, supra, said that in such cases "notice of the corporation's ownership of the funds came from the instrument itself. In the absence of such notice there must be proof that the one who receives the money knows or has reason to believe the same to be a misappropriation."

But it is not sufficient to show that the party dealing with the bank officer is put on notice that the latter is interested in the transaction adversely to the principal whose interests it is his high duty to protect? The question concerns the officer's authority, and, if the party dealing with him knows or is charged with knowledge that his authority does not extend to the business in hand unless it has been especially conferred, then the duty of inquiry arises; otherwise he acts at his peril. This is brought out with clarity and force in the case of Lamsonv. Beard, 94 F. 30, 45 L.R.A. 822 (C.C.A. 7th). The case holds that commission merchants in Chicago, who accepted and cashed drafts drawn by the cashier of a small bank in Iowa in payment of his personal obligations, were liable to the bank for the money so received, the cashier not having been authorized by the directors of the bank to use drafts for his individual purposes. In the course of the opinion the court said:

"It is, doubtless, a not unusual practice for debtors to obtain and send to their creditors bank drafts, drawn payable to the creditors, and, of course, in every such case the creditor knows that the money of the bank is being used to pay to him the debt of another, — in the case supposed, the debt of John Doe. But in such cases the creditor may accept the draft without inquiry, not, as counsel have said, because of a presumption that the debtor had paid for the draft, but because the draft had been drawn by the authorized officer of the bank in the usual course of business, acting without apparent or known personal interest in the transaction. The receiver of such a draft, though named as payee, and on the face of the paper apparently a party to the original execution thereof, is not so in fact, but, as against the drawer, is in effect an indorsee, affected only by vices or infirmities of which he had notice before he accepted it. He might know that the draft had not been paid for, and yet take it on the assumption of regular and proper execution upon some other consideration than payment. The inquiry, therefore, which these plaintiffs in error should have made, was whether Cassatt had authority to draw drafts of the bank upon funds of the bank in possession of its correspondents for use in his individual transactions. Such an inquiry involved no difficulty beyond communicating to the directors of the bank, other than Cassatt, the fact that such a draft or drafts had been tendered in discharge of liabilities incurred in dealings upon the Board of Trade in Chicago, and asking whether the execution of the paper had been authorized. There can be little doubt what would have been the result of such an inquiry, accompanied with a frank and full statement of the facts as they were known to the payees of any of the drafts in suit at the time of execution. It would not have needed a discovery of Cassatt's fraudulent bookkeeping to enable the directors to say whether the execution of such paper had been theretofore authorized, or then had their approval. As contended, it was clearly no duty of the plaintiffs in error to undertake an examination of the books, which, once they commenced inquiry into the management of the bank, they would have learned had been wholly in the keeping of Cassatt, and of clerks who could not be expected to testify against him. Inquiry of Cassatt, too, it is to be presumed, would have been useless, and therefore, if made, would not have met the requirement of the law. The one thing necessary to be known was whether Cassatt had authority to make the proposed use of the bank's paper. The authority could have come only from the directors, by direct resolution or by acquiescence or implied assent, and the plain, unmistakable course was to push the inquiry, wherever begun, to the source of authority." (Italics added)

See, to the same effect, St. Charles Savings Bank v. Edwards,243 Mo. 553, 147 S.W. 978.

In cases such as Lamson v. Beard, supra, and Hier v.Miller, supra, the fact that the bank officer is using bank monies for his individual purposes may be more apparent than in a case such as this. It could perhaps be plausibly argued that the personal check of the bank officer is some assurance to the one receiving it that the money is on deposit with which to pay it. But it is not the check by itself which is the basis of the bank's asserted liability; it is the act of the officer in receiving it for deposit and issuing a deposit slip showing that the bank has become indebted to the recipient in the amount of the check. It is the binding effect of the agent's assumption of authority which is and must be the foundation of the plaintiff's claim. Without that there would be no semblance of a right to recover against the bank. The charge in the complaint in this case is that "plaintiffs deposited to their credit with the defendant Harney County National Bank the sum of $7,650.00, making a total of deposits as aforesaid of $37,889.22, all of which said sums defendant Harney County National Bank promised and agreed to pay and disburse according to and upon the demand and order of the plaintiffs, but defendant Harney County National Bank failed and neglected to credit said sum of $7,650.00 to plaintiffs' account." The plaintiffs' right to recover depends upon proof of the foregoing allegations, and, of course, if the evidence fails to show that the Bank, through its duly authorized agent, acting within the scope of his authority, accepted the check for deposit and promised to repay the amount thereof to the plaintiffs, their case fails.

As stated, it is the law that a bank officer has no authority to certify his own check. It is difficult to perceive even a plausible distinction between such an act and what was done here. In each instance the officer draws his check on his personal account with the bank and attempts to bind the bank to the payment of the check — in the former by stamping it "Good", in the latter by issuing a deposit slip for the amount of the check. In each instance he acts both as principal and agent, and, if the checks are in fact not good, the result of the establishment of a rule of law in accordance with the plaintiffs' contention would be to sanction the fraudulent use of the bank's funds by its officer.

In Haynes v. Lincoln Trust Co., supra, it was argued that the court should apply the rule that, where one of two innocent persons must suffer by the wrongful act of a third, he who gave the power to do the wrong must bear the consequences. But the court answered that the rule was without application where the plaintiff was dealing with a manager of a bank on his own personal business and the bank had not authorized him to pay his own debts with its funds; that in such case the duty rested on the plaintiff to ascertain if he was using his own funds and not misappropriating those of his employer; and that, while the burden might appear onerous and not in accordance with popular concept, yet "it gives effect to the only safe rule." As to the consequences to be borne either by the creditor or by the bank, the court said:

"The debt has not been paid. The creditor is in the same situation as before the fraudulent act of Noddin (the bank manager) was committed. He has the same right of action against him as he had then. The debtor may be bankrupt and the claim against him of no value, but there has been no change in legal status as between the principals in the transaction, and it would be an ominous and dangerous rule to hold that a bank can give its treasurer license to steal its own funds or those entrusted to it by other depositors to pay his own debts."

To put the matter somewhat differently: The rule invoked is not applicable because in a legal sense Fine was not an innocent person, and the court will not permit him to profit at the Bank's expense by giving effect to Brown's attempt to steal the Bank's money.

One of the cases relied on by the plaintiffs is GoshenNational Bank v. State, 141 N.Y. 379, 36 N.E. 316. It appeared in that case that the cashier of the bank was also county treasurer, and in the latter capacity had collected taxes for the state which he neglected to pay over. Upon receiving demand for payment he mailed to the state comptroller a draft drawn by him as cashier upon another bank, which the latter paid and charged to the Goshen Bank. The cashier, who was an embezzler, kept the fact of the drawing of the draft concealed from the other officers of his bank. The Goshen Bank sued the state to recover the amount of the draft. The evidence showed that the cashier had been authorized to draw drafts on the corresponding bank for himself upon the same terms that he had a right to draw a draft for a stranger, that is, upon payment to the bank for the amount of the draft. In view of this grant of authority the court held that the bank was not entitled to recover from the state the amount of the draft in question. A few months later the case ofBank of New York v. American Dock Trust Co., supra, was decided. It appeared in that case that the president of a storage and warehouse company, who had express authority to sign warehouse receipts, obtained a personal loan from the bank giving his note therefor, and deposited with the bank as collateral security a warehouse receipt signed by himself as president of the company and showing that certain cotton had been received by the company as storage "for account of M.W. Stone" (the president). The loan not having been paid and a demand by the bank upon the company for the cotton or its value having been refused, the bank sued the company for damages for issuing a spurious warehouse receipt. The decision was for the defendant. It was said that if the president had issued a receipt acknowledging the receipt of cotton from a third person, although none had been deposited, the defendant would have been liable because the president had general authority to issue receipts for cotton deposited by third persons. The principle was said to be "that where an agent has been clothed by his principal with power to do an act, in case of the existence of some fact peculiarly within the knowledge of the agent, and where the doing of the act is in itself a representation of the existence of that fact, the principal is estopped from denying its existence, as against third parties dealing with the agent in good faith, and in reliance upon the representation." But the authority granted could not be construed to extend to a case where the agent himself is the person interested on the other side, and consequently the warehouse company was not bound by the act of the president. The Goshen Bank case was distinguished on the ground that it appeared "that the cashier had power to draw drafts for his own use, or payable to his own order, upon the same terms that he had to draw a draft for a stranger, viz. upon payment to the bank of the amount of the draft", and "the very act of the issuing the draft was a representation of the existence of the fact that the draft was paid for." See, also,Hanover National Bank v. American Dock Trust Co., 148 N.Y. 612, 43 N.E. 72, 51 Am. St. Rep. 721.

This distinguishing feature of the Goshen Bank case is pointed out in Lamson v. Beard, supra, 94 F. 42, where, as we have seen, it is held that persons receiving drafts drawn by a bank cashier in payment of his individual debts are charged with knowledge of the cashier's want of authority to draw drafts for such purpose, and are liable to the bank for the monies so received.

In the instant case there is no evidence that Brown, the assistant cashier, had authority to receive deposits of his own checks, and such authority cannot be inferred. Bank of NewYork v. American Dock Trust Co., supra. The burden of proving that Brown had such special authority was on the plaintiffs.St. Charles Savings Bank v. Edwards, supra; Campbell v.Manufacturers National Bank, 67 N.J.L. 301, 304, 51 A. 497, 91 Am. St. Rep. 438.

The case of Pope v. Ramsey County State Bank, supra, is, we believe, the only decision supporting the plaintiffs' position. While there are expressions in Pemiscot County Bank v. TowerGrove Bank, 204 Mo. App. 441, 223 S.W. 115, and First NationalBank of High Bridge, N.J. v. Hudson, 166 A.D. 51,151 N YS. 595, which seem to aid the plaintiffs, the decisions themselves when considered in the light of the facts to which they relate do not. In the former case it appeared that the directors of the bank knew that the cashier had been in the habit of issuing bank drafts in payment of his personal checks given for his individual debts; in the latter case, with the knowledge of other officers of the bank, the cashier gave his personal checks in payment of the purchase price of securities which he was buying for the bank, but which he stole, and the books showed payment of such checks. Both were clear cases of apparent authority. So, likewise, were the following cases cited by plaintiffs: Ruden v. Citizens National Bank Trust Co.,64 S.D. 340, 266 N.W. 682; Citizens' Trust Co. v. Croll, 289 F. 421 (C.C.A. 7th); Wing v. Commercial Savings Bank, 103 Mich. 565, 61 N.W. 1009; People's Bank of Belleville v. Manufacturers'National Bank of Chicago, 101 U.S. 181, 25 L.ed. 907. In Bankof Taylorsville v. Blyth, 269 Ill. App. 16, also cited by the plaintiffs, it appeared that the cashier had been granted express authority to issue cashier's checks for his personal debts provided he paid for the checks. The point of distinction is the same as that in the Goshen Bank case. And in Gale v. ChaseNational Bank, 104 F. 214 (C.C.A.), the court held that apparent authority in the cashier to pay creditors with drafts drawn on his own bank did not exist, notwithstanding evidence that on five occasions prior to the transaction in dispute he had drawn drafts for such purposes.

The plaintiffs contend, however, that the evidence shows that Brown had apparent authority to use the funds of the Bank in payment of his personal indebtedness. They say in their brief in opposition to the petition for rehearing:

"The uncontradicted evidence of this case is that Brown had authority to issue deposit slips, that he withheld deposits of Plaintiffs-Respondents aggregating the sum of Sixty Six Thousand Five Hundred Seven and eighty-four/100 Dollars ($66,507.84); made improper charges against Plaintiffs-Respondents account of Fifty Thousand Nine Hundred Eleven and seventy-seven/100 Dollars ($50,911.77) and made deposits in the accounts of Plaintiffs-Respondents with Bank funds in the amount of Ninety Two Thousand Two Hundred Thirty Seven and seventy-nine/100 Dollars ($92,237.79) over a period in excess of four years. The Directors of the Defendant Bank permitted its cashier to embezzle approximately Four Hundred Thousand Dollars ($400,000.00) of its funds constituting one-third of the capital assets of the Bank, over a period of years."

A leading case on apparent or ostensible authority is Martinv. Webb, 110 U.S. 7, 28 L.ed. 49, 3 S. Ct. 428. The question there was whether the cashier of a bank was authorized to release the security of a deed of trust. It was shown that for about seven years the directors had left to the cashier the exclusive management of the bank, and that during that time he had satisfied more than 150 deeds of trust executed to secure debts held by the corporation, and in no instance had he received orders to do so from the board of directors. To all who came into the bank or had transactions with it his control seemed to be as absolute as if he were the owner of all the stock. Under these circumstances it was held that the bank would not be permitted to question the cashier's authority in the particular transaction. In the opinion by Mr. Justice HARLAN the facts showing the manner in which the bank's affairs had been conducted by the cashier were set forth at length "so that", as the court said, "the general expressions in this opinion may be interpreted by the facts of this case."

After stating that the cashier has no power by virtue of his office to bind the corporation except in the discharge of his ordinary duties, and that this would not include the exercise of the power in question unless the authority was delegated by the directors, the court said:

"While these propositions are recognized in the adjudged cases as sound, it is clear that a banking corporation may be represented by its cashier, at least where its charter does not otherwise provide, in transactions outside of his ordinary duties, without his authority to do so being in writing or appearing upon the record of the proceedings of the directors. His authority may be by parol and collected from circumstances. It may be inferred from the general manner in which, for a period sufficiently long to establish a settled course of business, he has been allowed, without interference, to conduct the affairs of the bank. It may be implied from the conduct or acquiescence of the corporation, as represented by the board of directors. When, during a series of years or in numerous business transactions, he has been permitted, without objection and in his official capacity, to pursue a particular course of conduct, it may be presumed, as between the Bank and those who in good faith deal with it upon the basis of his authority to represent the corporation, that he has acted in conformity with instructions received from those who have the right to control its operations. Directors cannot, in justice to those who deal with the Bank, shut their eyes to what is going on around them. It is their duty to use ordinary diligence in ascertaining the condition of its business, and to exercise reasonable control and supervision of its officers. They have something more to do than, from time to time, to elect the officers of the Bank and to make declarations of dividends. That which they ought by proper diligence, to have known as to the general course of business in the Bank, they may be presumed to have known in any contest between the corporation and those who are justified by the circumstances in dealing with its officers upon the basis of that course of business."

See, also, 1 Morse on Banks and Banking (6th ed.) 476, 481, 482, § 171; 4 Zollmann, Banks and Banking 457, § 2414. The cases of Wing v. Commercial Savings Bank, supra, and Anderson v.Kissam, 35 F. 699, reversed sub nom. Kissam v. Anderson,145 U.S. 435, 36 L.ed. 765, 12 S. Ct. 960, relied on by the plaintiffs, contain nothing that is out of harmony with the principles stated in Martin v. Webb, supra.

The question here, as we view it, is not whether Brown was authorized to use the Bank's funds to pay his individual debts. In view of the addition to the Federal Reserve Act of June 16, 1933, 12 U.S.C.A. § 375a, which provides that "no executive officer of any member bank shall borrow from or otherwise become indebted to any member bank of which he is an executive officer, and no member bank shall make any loan or extend credit in any other manner to any of its own executive officers", it was beyond the powers of the directors to confer such authority.

Plaintiffs argue that the statute cannot affect their contractual rights with the Bank, and cite the case of Goldsteinv. Union National Bank, (Tex.Civ.App.) 216 S.W. 409. That case had been previously before the Supreme Court of Texas, 109 Tex. 555, 213 S.W. 584, and the law of the case there established. It was an action on a promissory note executed to a bank by the defendants, one of whom, Walker, was an officer of the bank and, with the other defendant, Goldstein, was a stockholder in L. Wenar Millinery Co., a corporation, which was a depositor and customer of the bank. The defendant, Goldstein, alleged in his answer that, the millinery company being indebted to the bank in the sum of $20,000.00, which was the full loaning capacity of the bank to any one person, firm or corporation, the millinery company and the bank, represented by Walker, agreed that Goldstein and Walker should execute notes for the accommodation of the millinery company to be discounted by the bank, the proceeds thereof to be used by the millinery company in transacting its business in some other way than paying its indebtedness to the bank, and that deposits made by the millinery company with the bank should be applied at once to the extinguishment pro tanto of any note made by the defendant, Goldstein, pursuant to said agreement; but that the bank, contrary to such agreement, had applied deposits made by it in liquidation of the millinery company's indebtedness to it. It was claimed that Goldstein was entitled to have these deposits credited on the note sued upon and which was given in pursuance of the agreement stated. The Texas Supreme Court apparently held that the answer stated a good defense to the action.

If that be the effect of the decision, it is in conflict withDeitrick v. Greaney, 309 U.S. 190, 84 L.ed. 694, 60 S. Ct. 480, and Federal Deposit Insurance Corporation v. Vest,122 F.2d 765. The former case holds that one who knowingly gave a note to the bank as a substitute among its assets for shares of its stock illegally purchased and retained (in violation of12 U.S.C.A. § 83) could not plead as a defense in an action on the note that the obligation was in effect fictitious. The court, speaking through Mr. Chief Justice Stone, said:

"Since it is by virtue of the statute that respondent's agreement is unlawful and that the benefit of it as a defense to the note is denied; and as the purpose of the statute is to protect creditors of the bank from the hazard of violations of the Act like the present, it is immaterial that the bank's officers were participants in the illegal transaction * * *"

In Federal Deposit Insurance Corporation v. Vest, supra, an accommodation note was given to a national bank at the instance of its president to enable the president to obtain funds from the bank without appearing to be a borrower. The court held, on the authority of the Deitrick case that, since it is unlawful for an executive officer of a bank to borrow from the bank (12 U.S.C.A. § 375a), the fact that the note was without consideration could not be pleaded against the bank. Answering the contention that the defendant did not know that the statute prohibited the bank officer from borrowing the bank's money, the court said:

"It is beside the point to say that he acted in good faith and without intent to defraud the bank or its creditors. The vital question is, whether he wittingly or unwittingly was a party to an act made unlawful by the National Banking law and of this there can be no doubt."

We regard these federal decisions as authoritative.

According to Professor Mechem, powers of an agent commonly referred to as "apparent" are either (1) those which are incidental to the main authority conferred because that is the regular and ordinary way of doing business, or (2) those which are "sought to be deduced from special circumstances of recognition, acquiescence or holding out", as to which "the principle of estoppel or something akin to it at least, must be invoked". 1 Mechem on Agency 509-513, §§ 720-726. In the latter class of cases the author says:

"* * * it is obvious that the doctrine can apply only in those cases in which (the) element of reliance was present. It can therefore apply only to cases in which credit has been extended, action has been induced, delay has been obtained, or some other change of position has occurred, in reliance upon the appearance of authority * * *" Ibid. 512, § 724.

Agreeably to the foregoing principles, it would seem to be manifest that in neither aspect of the question could it be said that the assistant cashier, Brown, had apparent authority to use the funds of the Bank for his private purposes. That would be a violation of the Federal Reserve Act, and, therefore, not incidental to the main powers he possessed. And, of course, the plaintiffs could not be heard to say that they relied upon such appearance of authority, since they were charged with knowledge that it was an authority the exercise of which would be unlawful and beyond the powers of the directors to confer. FederalDeposit Insurance Corporation v. Vest, supra. See in this connection 1 Morse on Banks and Banking (6th ed.) 482, § 171; Merchants' Bank v. State Bank, 10 Wall. 604,19 L.ed. 1008; Pensacola Bank Trust Co. v. National Bank of St.Petersburg, 59 Fla. 347, 357, 52 So. 294; Anderson v. Kissam, 35 F. 699, at p. 702.

But this may be put out of view, for the real question relates to the apparent authority of Brown to bind the Bank by accepting for deposit his own check drawn on his personal account at the Bank and given in payment of his individual debt. On this question there is no evidence whatever, and the case is, therefore, unlike Martin v. Webb or any of the other cases to which we have referred. It is not shown that Brown had ever before, either with Fine or anyone else, assumed to exercise such authority. Indeed, there is a singular paucity of evidence as to the powers which he did exercise. If this was "a one-man bank" it is not disclosed by the record. It may, perhaps, be inferred from the fact that Brown was able without detection to embezzle $400,000.00 of the Bank's money that he was active in the conduct of its business. He was also evidently very active in the preparation of false customer's statements for delivery to Fine and, probably, to other depositors, and in making false entries in the Bank's ledger sheets which contained the records of deposits and withdrawals of the various depositors. By these and, no doubt, other methods not disclosed, he successfully concealed his embezzlements from the directors of the corporation and the bank examiners over a period of several years. But the evidence has no tendency to show authority in Brown, conferred on him by "acquiescence of the corporation" in a "particular course of conduct", to accept on behalf of the Bank his own checks for deposit and credit the depositor with the amount thereof. And there is no evidence in the case that the plaintiff Fine did in fact rely and act upon this supposed course of conduct of Brown, and therefore no estoppel in pais was created upon the defendant Bank. Gale v. Chase NationalBank, supra, 104 F. at p. 219.

We conclude that the claim of apparent authority has no support in the record.

We come to the final contention of the plaintiffs based upon two deposit entries appearing upon the plaintiffs' account in the Bank's ledger, one dated February 28, 1941, in the amount of $7,000.00, and the other dated May 3, 1941, in the amount of $749.98. The transaction here in dispute occurred on February 11, 1941, and the plaintiffs say that these subsequent credits constitute a restitution of the amount of the $7,650.00 check which was not entered as a credit on the books of the Bank.

The entries now in question were made by Brown, as we stated in our former opinion, to prevent overdrafts appearing in the plaintiffs' account, which would have led to the discovery of Brown's embezzlements. We characterized them as fictitious. Counsel for the plaintiffs take issue. They say that the deposits are supported by drafts on the Bank of Baker; that the defendant Bank is estopped to deny their validity; and that the burden is on the defendants to prove that the Bank did not actually receive the funds. Upon the last proposition they quote from Anderson v.Kissam, supra, but we are unable to see anything in that case relevant to the question.

We are still of the opinion that these were fictitious entries made by Brown for the purpose stated. If the defendants had the burden of proving their real character we think they have done so conclusively. Besides the entries themselves the only evidence relied on as showing that they were deposits of actual funds, consists of deposit slips in Brown's handwriting purporting to show two drafts drawn on the Baker bank in the respective amounts of the entries. There is no record to show that such drafts were actually issued or paid, or that the defendant Bank had money on deposit at the Baker bank. The $7,000.00 deposit of February 28, 1941, was entered when the Fine account showed a balance of $3,666.38, and on the same day a check for $10,000.00 was paid. The $748.98 deposit was entered on May 3, 1941, when the balance in the account was $9.25, and the next day a check for $700.00 was paid. Mr. Fine testified that he did not make either of these deposits, and he gave similar testimony with respect to many others of the same character that appear upon his ledger sheet. After the Bank's failure he made a settlement with Mr. Rummell, the national bank examiner who came to take charge of the Bank's affairs, which covered every irregular item in the account except the check involved in this case. All improper charges against the account were eliminated and the plaintiffs were given credit for all deposits actually made but not credited on the books, except the check for $7,650.00; and, as we understand the record, amounts which had been improperly credited to the Fine account were charged back to the plaintiffs. A balance in excess of $22,000.00 in the plaintiffs' favor was arrived at and the money paid to them. Both Fine and Rummell testified to the facts of this settlement, and, while neither stated specifically that the improper credits were charged back, we assume they must have been because Rummell testified without contradiction that everything was settled satisfactorily except the $7,650.00 item. If, however, we are mistaken in this interpretation of the evidence, then the plaintiffs have no cause to complain because, through withdrawals, they received the benefit of the two deposits in question. If we have correctly construed the evidence, the settlement made conclusively establishes that these were fictitious deposits acknowledged to be such by Fine himself.

If this were a case in which the Bank was suing to recover the amounts of these two deposits after they had been withdrawn by the plaintiffs, then Williams v. Dorrier, 135 Pa. 445,19 A. 1024, upon which their counsel rely, might be applicable. In that case it was held at nisi prius (the point not being involved on the appeal) that, where a cashier of a bank credited a depositor with a sum of money on the books of the bank as payment of the cashier's private debt, and the depositor withdrew the money, in an action brought by the bank's receiver to recover the money so withdrawn, the bank must be taken to have acquiesced in and ratified the action of its cashier and is estopped from setting up his want of authority to give the credit. This, however, is not an action by the Bank to recover the amount of these two deposits, and, in view of the evidence of the settlement between Fine and the bank examiner, Williams v. Dorrier can in no aspect of the case be held applicable.

There is a further reason why the plaintiffs' position in this regard is untenable. This case was not brought on the theory now advanced. The plaintiffs sued to recover the amount of a deposit which, they alleged in their complaint, the defendant Bank "failed and neglected to credit * * * to plaintiffs' account". They ought not to be permitted to recover on the theory that the amount of deposit was in fact credited to their account.

After the parties had rested the defendants moved for a directed verdict and the court denied the motion. It is our opinion, after reconsideration of the case, that for the reasons herein stated this was error. The assistant cashier, Brown, was not authorized to act for the Bank in the transaction and his acts, therefore, could not and did not create a deposit liability against the Bank for the amount of the check in question. The defendant Federal Deposit Insurance Corporation was sued as guarantor of the alleged deposit liability, and the case against it falls with that against the Bank.

Our former opinion affirming the judgment against the Bank and remanding the cause for a new trial as to the Insurance Corporation is set aside.

A separate judgment was entered against each defendant. These are reversed and the cause will be remanded with directions that they be vacated and judgments for the defendants entered.